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Monday, 15 July 2013

A report issued by KFH-Research states that the global sukuk market has shown resilience this year given the volatility in global bond markets as market players react to positive economic growth prospects as well as concerns over monetary policy in the US, the world's largest bond market.

The report mentions that despite rising yields across the board, sukuk issuances have kept up momentum with over $26.6bn placed during the second quarter, which adds to the $34.5bn placed during the 1Q13 to bring the first half total to $61.2bn.

The amount was however lower than the amount issued in same period of 2012, mainly because in January 2012 the market saw the largest issuance to date. On a monthly basis, the primary sukuk market in 2013 has outpaced the previous year every month since January 2013 except June 2013.

Moreover, the report states that Malaysia held the largest market share of the primary market in 1H13 primarily due to the central bank issuances that amounted to almost $28.2bn (1H12: $24.5bn). The Malaysian market saw $18.4bn worth of sukuk papers domiciled on its shores in 2Q13, while Saudi Arabia witnessed $4.5bn and the UAE$1.4bn, collectively accounting for 91.0% of the primary market. US dollar amounts were down in most domiciles (except the UAE) in 1H13 from the previous year due to lower sovereign issuances, except Malaysia which has seen a 53.5% slump in corporate issuances.

The report explained, "Global outstanding sukuk reached $245.3bn as at end-1H13, up 7.0% from $229.3bn as at end-2012 and 16.4% y-o-y. The secondary sukuk market in Malaysia remained the largest totalling $148.2bn and accounted for 60.4% of the total market as at end-1H13. This was followed by Saudi Arabia ($32.0bn, 13.0%), the UAE($20.9bn, 8.5%) and Qatar ($17.8bn, 7.3%). Growth in the secondary market over the first half of the year was driven by Turkey, rising by 133.3% from the amount outstanding as at end-1H12. This was followed by Saudi Arabia (28.4%) and Indonesia (13.5%)."

Furthermore, the report added, "The HSBC/Nasdaq SKBI Yield Index shows that overall sukuk yields have risen sharply in 2Q13, with an increase of 43.0% to the highest level in over 25 months. The sharp rise in sukuk yields, especially in comparison to US Treasury benchmarks, followed the rise in overall emerging market debt, which had seen yields for borrowers in developing countries climbed to 5.02% after reaching an unprecedented low of 4.04% on 24 January 2013, according to the Bank of America Merrill Lynch US Emerging Markets External Debt Sovereign and Corporate Plus Index. Similarly, the emerging markets, which includes the Middle East and Asia, have seen credit default swaps tumbled at the end of the 1H13, according to the Markit CDX Emerging Markets Index, on concerns that the Fed will lead policy makers in reducing support to bolster growth as economies from China to Brazil slow. Prices of the emerging market credit default swap benchmark fell 4 cents in June to 107 cents on the dollar. The decline was the biggest since the failure of Lehman Brothers Holdings Inc. reverberated across financial markets and caused the index to plunge 6.7 cents in the period ended 18 November 2008."

Based on the issuance momentum seen in 1H13, the global sukuk issuance is expected to illustrate resilient but moderated growth this year. The prospects for the sukuk market are expected to remain bright. Having grown at a compound annual growth rate of 57.0% over the past decade, the sukuk industry is expected to continue its growth trajectory for the remainder of the year.

Islamic banking is not unaware about those risks which are faced by conventional banks. All bankers know too well that "Risk has no religion!" Almost all risks common to conventional banks are also faced by Islamic banks...plus more. This article analyses the additional risks Islamic banks are exposed to, by virtue of dealing with Sharia-compliant modes of financing.

Unexpected losses

Risk is seen as the probable loss of income and the value of assets. Only unexpected losses are included, and expected losses are not included, in the definition of risk. Banking is about the intermediation of short-term risks, which come in different forms and directions.

The "Depositors" may withdraw their funds; the "Banks" tend to leverage with debt and accumulate assets to maximise return on equity; the "Counter-parties" may default on their obligations; the "Regulators" seek banking system soundness and market equilibrium; other "Parties" within the interlinked balance sheets may have contingent claims on each other and, if the matters get worse, the "Public/tax payers" face the cost of deposit protection and financial crisis.

Sources of funds for both conventional and Islamic Banks are quite similar, with some exceptions.

Tier 1 Capital is made up of Equity Capital for both; Tier 2 Capital for conventional banks may be in the form of subordinated loans or preference shares, whereas for Islamic Banks, Sukuk may qualify; Current and Savings Accounts are common to both; Time and Certificates of Deposit in conventional banks are replaced by Unrestricted Profit Sharing Investment Accounts (PSIAs) in Islamic Banks. Further, there are special Reserve requirements for Islamic Banks, in the form of Profit Equalisation Reserve (PER) and Investment Risk Reserve (IRR), to mitigate the Displaced Commercial Risk and Rate of Return risk. Conventional banks generally make provisions for specific bad debts to comply with regulatory requirements.

Risk Management:

Risk Management for Sources of Funds, therefore, is different for some, but common for others. Current and Savings Accounts, Time and Certificates of Deposits and other fixed income liabilities in conventional banks are protected by Shareholders' Equity, Preference Share Capital and Subordinated loans.

In Islamic banks, Current Accounts are protected by Shareholders' Equity, whereas PSIAs are protected by Profit Equalisation Reserves (PER) and Investment Risk Reserves (IRR). Shareholders' Equity protects PSIAs only for fiduciary risks where the loss in value results from a bank's own negligence, errors or fraud.

Generally speaking, the Cost of Funding for conventional banks tends to be fixed whereas, theoretically, for Islamic Banks it tends to be variable. However, in practice, even Islamic Banks attempt to keep their Cost of Funding fixed for better management of their Sources of Funds.

Uses of Funds for both conventional and Islamic banks are similar, except that Loans & Advances in conventional banks are replaced by Murabaha, Musharaka, Istisna'a, Salam or Ijara Receivables, which are the Sharia-compliant modes of financing practiced by Islamic Banks. As a result, some related assets and inventories may also appear on their balance sheet to account for assets-in-transition, pending either the completion of a transaction or other reasons. Sustaining losses resulting from reduction in the value of assets follow similar patterns in both conventional and Islamic Banks.

Expected Losses are handled out of the "Income" by both conventional and Islamic Banks. Unexpected Losses from Credit, Market and Operational Risks are generally covered by Shareholders' Equity, Preference Shares, Subordinated Debt and other Reserves by conventional banks. Contingent losses are protected through Insurance coverage.

In order to ensure the stability of an Islamic bank, they tend to cover their Expected Losses from "Income", while Unexpected Losses from PSIA-financed assets are protected by PSIAs (equity in nature), Profit Equalisation Reserve and Shareholders' Capital, whereas assets financed by Current Accounts and Shareholders' Equity are protected by Shareholders' Equity and Investment Risk Reserves. Like conventional banks, Contingent losses are protected through Sharia-compliant Takaful (Insurance).

There is no gain saying that Islamic banking and finance has provided ample opportunities for women to excel in their professional life. There is a growing band of women professionals who have and are actively contributing to the development of Islamic finance in their own right.

There is no gain saying that Islamic banking and finance has provided ample opportunities for women to excel in their professional life. There is a growing band of women professionals who have and are actively contributing to the development of Islamic finance in their own right.

The role of women in Islamic finance has never been more prominent than in Malaysia. Malaysian women have not only set the pace to occupy high positions in Islamic banking but have been playing a prominent role in the overall development of Islamic finance.

In an article published in the February issue of ISFIRE, a quarterly magazine published by the London-based Edbiz Consulting Ltd, a list of 20 top women in Islamic finance was published, out of which 15 happened to be Malaysians.

Heading the list is Tan Sri Dr Zeti Akhtar Aziz, governor of Bank Negara Malaysia (BNM), where she has inter alia put Islamic finance firmly on the global radar through her work in Malaysia as well as at the international front.

But what really stood out the most is that the list includes some other exceptionally talented Malaysian women whose real potential has yet to be realised and acknowledged.

Some of the better recognised women figures are Engku Rabiah Adawiah Engku Ali, a professor of law at International Islamic University Malaysia, who has inspired a whole generation of women Shariah scholars, and Raja Teh Maimunah Raja Abdul Aziz, CEO of Hong Leong Islamic Bank Bhd.

Very few people, however, would know Dr Wan Nursofiza Wan Azmi, head of strategy and policy development at Asian Institute of Finance, whose book on Islamic banking and finance has been published in three different languages. Without a doubt the list of successful women in Islamic finance in Malaysia is non-exhaustive.

All these success stories reflect the government’s commitment to develop a talent pool for the Islamic financial services industry. The newly created Finance Accreditation Agency by BNM and Securities Commission Malaysia is another milestone for Malaysia towards enhancing the quality of talent in the financial services industry, with its first year focus on Islamic banking and finance.

Although women have excelled in the Islamic financial industry, only a handful of them hold senior positions. In the Middle East, preconceived ideas on the role of women in the society is still plaguing the industry although positive changes have slowly begun to filter their way into the mindset of the society at large.

This Saudi phenomenon offers a different challenge for women. Here, gender separation is entrenched as part of the culture, thus empowering women through greater participation in the workforce becomes a daunting but not impossible task.

Employment of women provides Islamic banks a choice: Either to employ women for lower wages (as has been the case in many other sectors) and improve their cost efficiency; or empower women by offering them employment on equal opportunities and grounds.

Women’s participation in Islamic finance should, however, be viewed in a wider context. The role of women in economic development has traditionally taken a back seat.

As with many developing countries, women in Malaysia are still hugely under-banked or unbanked than men. Islamic banks can leverage on their women work force to promote participation of those financially excluded women through mobilisation of savings and easier access to credit.

This will have an effect of bringing them into the formal banking net and tackling financial exclusion issues.

Ladies branches that have proven to be very successful in Saudi Arabia, can be emulated by Islamic banks in Malaysia.

The proposed ladies branches may also provide a full package of banking, beauty and health services so as to meet the requirements and needs of women customers.

The Dubai Islamic Bank (in the United Arab Emirates) has targeted this niche area by developing Johara banking for ladies and has gone a step further by offering women-focused financial products such as beauty, health and shopping benefits.

The ladies only branches can also house children nurseries for the working women, an area that is bound to be extremely profitable in a country like Malaysia.

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